M&As

Question 1

What is an acquisition?

Answer 1

Acquirer (bidder) purchases all or part of the target’s stock or assets.
Can be friendly or hostile

Question 2

What is a merger?

Answer 2

bidder acquires all assets & liabilities of target and target ceases to exist : new entity usually takes on new form
- usually stock transaction but can include cash sweetner

Question 3

What are the types of mergers?

Answer 3

1) Forward Merger
2) Reverse Merger
3) Consolidation
4) Forward Triangular Merge
5) Reverse Triangular Merge

Question 4

What is a forward merger

Answer 4

The target company merges INTO the buyer and ceases to exist. All its assets, rights and liabilities are absorbed.

Question 5

What is a Reverse Merger?

Answer 5

A smaller private company absorbs a larger public entity and gets listed in that way.

Question 6

What is a consolidation?

Answer 6

Both companies cease to exist and create a totally new company

Question 7

What is a forward triangular merger?

Answer 7

A company acquires a target company through a subsdiary (shell company).

Question 8

What is a reverse triangular merger?

Answer 8

Used widely by SPACs.
- Acquiring company creates a subsidiary to buy target
- target company absorbs subsidiary to create new company (now totally absorbed inot group/holding company)

Question 9

What are the 3 types of acquisition?

Answer 9

1) Horizontal: Both firms in same industry (eg competitor) to divide MS & get economies of scale
2) Vertical: Diff stages of same industry: access to resources/distribution.
3) Conglomerate: firms not related, may lead to economies of scasle in provision of company-wide services

Question 10

What is a merger wave?

Answer 10

A period of time in which more merger bids materialise than usual.
6 since 1895.

Question 11

What are the 3 most common drivers of a merger wave?

Answer 11

1) Positive stock market conditions
2) Technological change
3) Overcapacity
If stock overvalued, mngt uses premium valuation to acquire through stocks

Question 12

What were the 6 merger waves since 1895?

Answer 12

1) 1890-1900s: Monopoly competitors consolidate wave
2) 1925-1930: Oligopoly (vertical) wave
3) 1970s: Conglomerate oil companies wave
4) 1990s: Refocusing wave: LBOs
5) Late 90s/early 00’s: Strategic Wave: greed! Eco of scale
6) 2004-2007: Globalisation wave driven by PE market

Question 13

3 examples of mergers?

Answer 13

1) Vodafone & Mannesmann
2) Delta & Northwest Airlines
3) AT&T and time warner

Question 14

When + What vodafone mannesmann merger?

Answer 14

Nov 1999 first take over bid refused.
-vod addressed to shareholders directly: 53.7vod/1mannesmann
- hostile takeover might succeed –> mannesmann deal
- final agreement: 58.96vod/1man + better integration (dusseldorf & staff retention)

Question 15

When+what delta+northwest airlines merger?

Answer 15

15th apr 2008: merger agreement to become largest commercial airline in the world.
Huge ‘back office’ savings (IT, marketing, finance and HR)

Question 16

When + what AT&T and time warner merger?

Answer 16

22nd oct 2016: deal completed:
-TW library content combined with AT&T extensive customer relationship
- justice department tried to block
-expected $1bn annual cost savings
17 may 2021: AT&T leave entertainment: ownership warner media then merges with Discovery: Warner Bros Discover 8th April 2022.

Question 17

What is the role of an IB in M&A

Answer 17

1) Comprehensive valuation
2) Merger consequence analysis
3) Select Buyer list
4) Set guideline for range of acceptable bids
5) Evaluate offers received
6) Guide negotiation for disposal price
7) Offer a “fairness option” (independent IB/consultant)

Question 18

What is the M&A process

Answer 18

1) Hiring the IB (2diff)
- retainer fee: non-refundable
- success fee
2) Valuation:
IB will advice on value maximisation, speed of execution and certainty of outcome, consequence analysis + price expectations
3) Searching for potential counterparty: strategic/financial: negotiated sale/auction (dep #bidder)
4) Bidder confidentiality agreement & confidential information memorandum:
-teaser
-CIM
-BCA (involves NDA)
5)Bidding
- after analysin CIM
6) Defensive MA & SA
- DMA: regulations transation w info on price, timing, consideration, termination (fees)
7) Fairness opinion and closing
- prior to DMA/DSA
= certification about value of deal

Question 19

Why is M&A still not done deal after signing DMA&DSA?

Answer 19

Need to:
- secure approval from target’s shareholders
- source approval from antitrust authorities (competition commission and office for fair trading)
- arrange financing for the deal

Question 20

What is a material adverse charge (MAC)?

Answer 20

Sets conditions where bidder can withdraw from deal

Question 21

What is a Fiduciary out?

Answer 21

An embedded option in DMA/DSA contract:
-Target includes a clause that allow its BoD to change its mind on the sale.
-May be exercised when another offer is tabled

Question 22

What is a break-up fee?

Answer 22

paid of target to bidder if deal not concluded

Question 23

What are buy-side motives for M&A?

Answer 23

1) value release: target less than true value
2) value creation: synergies (diversify business lines and get access to new markets or technology)

Question 24

What are the benefits of synergies?

Answer 24

1) cost savings
2) increase MS
3) improved operational efficiency
4) more product offerings

Question 25

What are sources of synergy?

Answer 25

change in cash flow(t):
difference between cash flows at date t of the combined firm and sum of cash flows of 2 seperate firms

Question 26

What are 2 academic studies on synergies and their findings?

Answer 26

1) Strower.M “synergy trap” 1997 –> M&A deals fail to deliver the expected synergies due to lack of planning and execution
2) Kiegler et al 2015 –> looked at key trends and challenges

Question 27

What are the 4 categories of sources of synergy?

Answer 27

1) Revenue Synergies: cross-selling opportunities, expanded customer base, one-stop-shop, more pricing power
2) Cost Synergies: reduction of duplicate costs and optimisation operations: consolidation of back office functions, less overlapping staff and facilities and increase supply chain
3) Financial Synergies:
-TAX down if one company has unused tax losses - offset against profit of other
- Capital requirements (lower Ke)
4) (Strategic Synergies)

Question 28

What is the CF effect of merger?

Answer 28

Ch(CF)= ch(rev) -ch(cost)-ch(tax) - ch(cap requirements)

Question 29

What are other motives of M&A

Answer 29

1) Managerial motives:
- agency problems through acquisitions (prestige, keep job)
2) Diversification:
-combination of 2 cf streams that are not perfectly correlated decreases risk: NPV should be 0 if only motive.
BUT? Is it job of management to diversify the business when shareholders can diversify their own portfolios?

Question 30

What are takeover defense mechanisms classifications? (shark repellents)

Answer 30

1) Corporate charter and by-law amendments
2) Financial Techniques
3) Structural and strategic actions

Question 31

What is corporate charter and by-law amendments?

Answer 31

• companies set min acceptable price or SUPERMAJORITY vote (2/3 of 75%)
• US–> reincorporate diff state

Question 32

What are financial techniques of takeover defense?

Answer 32

1) poison pill
2) golden parachutes
3) issue debt to pay special dividend or purchase “share buyback”
4) Sell crown jewels

Question 33

What are structural and strategic actions?

Answer 33

1) Seeking a “white knight”
2) “White squire”
3) Management buyout
4) sell crown jewels to friendly
5) Buying competitor (antitrust)
6) Pacman

Question 34

What are Sarvaes and Zenner (1996) findings on role of IBs in M&A?

Answer 34

1) Transaction cost hypothesis
- acqs more likely to use IB when buy more complex and mngt no M&A exp
2) Assymetric info hypothesis
- more likely IB if target operates in diff industries
3) Contracting cost hypothesis
- purchase public companies
- lower inside ownership (greater free-float)
-hubris potential

Question 35

What was Allen et al (2004) finding on role of IBs?

Answer 35

• certification effect true if CB advisors for targets
• acquirers: if prior lending relationship: CB due to implicit promise of bank loans

Question 36

What are the findings of Rau (2000) role of IBs in M&A?

Answer 36

1) Superior-deal hypothesis:
prediction: Acquirers advised by top-tier IBs should earn hihger announcement-period excess return
finding: yes act of signaling quality
2) Deal-completion hypothesis
prediction: no positive relationship between excess returns earned by acquirers and MS of IB (#deals!!)
finding: yes fees are contingent on completion
deal completion: more effort + chance of completion if acquirers pay higher acquisition premiums!!